Economica: CEOs are more optimistic than most people

CEOs have a more optimistic outlook on life than the general population and they are more willing to take risks, a trait that influences companies' financial policies.

These are among the findings from Duke University's Fuqua School of Business, which conducted 3,000 personality tests among CEOs of public and private firms based in the US, Europe and Asia.

"CEOs are much more optimistic than others, including CFOs," said Manju Puri, professor of finance at Fuqua. "Ony 5% of CFOs consider themselves more optimistic than the CEO of their company. Finance executives go so far as to say that their CEOs are more optimistic about almost everything in life, even beyond their outlook on business prospects."

Psychological characteristics of CEOs are closely linked to corporatepolicies. For example, optimistic CEOs use more short-term debt than other firms because they are optimistic about future financing needs. Companies initiate more mergers and acquisitions when the chief executive is more risk tolerant.

Executive pay structure is also affected by leaders' personality traits. Risk-taking CEOs are much more likely to be paid with proportionately more stock, options and bonuses and less likely to be paid with a salary. In addition, CEOs who are impatient earn proportionately more in salaries rather than stock options and bonuses as compared to patient CEOs.

"Our results on riskaversion and incentive pay are striking," said Puri.

"In general it costs a company more to compensate a risk-averse CEO with incentive plans because the firm needs to encourage its executive to take on valuable investment projects that happen to have more risk. Our results suggest that firms match CEO personality traits and risk aversion to the compensation package in a way that reduces the cost of incentive compensation."

The results of the study will be published in an article titled Managerial Attitudes and Corporate Actions, in the Journal of Financial Economics.